What is “Carbon Liability to Earnings and Assets Ratio”
Carbon Liability to Earnings Ratio (CLEAR) is the ratio of a company’s direct greenhouse gas (GHG) emissions liability to company earnings.
It is calculated as:
CLEAR = (Direct GHG emissions x Carbon Price) / Earnings
When calculating, it is preferable to use an Earnings before interest, tax, depreciation and amortization (EBITDA) figure. In this case CLEAR provides an implied carbon tax rate.
For example, suppose a company reports pre-tax earnings of £5bn ($6.5bn) and direct GHG emissions of 5 million tonnes of CO2. With a carbon price of £18 ($23) per tonne, say, then the company’s CLEAR could then be calculated as 5,000,000 x £18 / £5,000,000,000, or 1.8%.
In essence, the carbon liability to earnings ratio indicates the proportion of earnings that may be required to pay for carbon taxes and liabilities. The higher the ratio, the larger the proportion of earnings that are liable.
The CLEAR ratio may also be used to determine the estimated proportion of loss and damage attributable to greenhouse gas emissions by using an appropriate Carbon Loss Index. For example a carbon loss index of £18 ($23) per tonne for a company emitting 5 million tonnes of CO2 would result in a carbon liability exposure of £90m ($115m), even in the absence of a regulated carbon tax scheme.
Author: Edward Coe
Edward Coe is Managing Director and co-founder of PAL. He has extensive experience of systems development and implementation for advanced derivative trading systems utilising a broad range of technologies supporting in house, bespoke and third party software. Edward developed the software behind PAL Carbon.